Les han pillado: Spanish banks bought about EUR68bn of government bonds December through February. Italian banks bought around EUR54bn of government bonds, but also accumulated EUR98bn in bank bonds. Given the current environment, this is unlikely to represent an actual investment in financials, but rather a reflection of retained, government-guaranteed issuance. This leaves Italian banks in a very different position compared to Spanish ones. Spanish banks either had to post existing assets (at generally higher haircuts than for government guaranteed issuance) or purchase high-quality collateral to draw down liquidity to hedge their funding risks. Assuming similar challenges on the funding front, Italian banks are currently long cash compared to Spanish banks. This leaves them in a much better position to support their sovereign going forward.

Maybe it was Mario Draghi pooh-poohing the idea that the ECB might start to withdraw its support for european banks. Or maybe it was just further consideration of Wednesday’s frank words from Spanish prime minister Mariano Rajoy…

Spain is likely, in our view, to be pushed into a troika (EC, ECB, IMF) programme of some kind during 2012, possibly by losing access to market funding on affordable terms, but more likely by the ECB making a programme for the Spanish sovereign a condition for continued willingness to fund the Spanish banks, which are currently the main buyers of newly issued Spanish sovereign debt.